August 2022 IIP contracts by -0.83% after a gap of 18 months

Is the RBI hawkishness helping to control inflation? That answer to that question is still ambivalent. Is the RBI hawkishness impacting growth? the answer to that question is a lot more affirmative. It is evident in the latest IIP (index of industrial production) number announced by the MOSPI for the month August 2022 (IIP has a one month lag). IIP for August 2022 marked the first negative IIP figure (-0.83%) after 17 consecutive months of positive IIP growth. That surely does not make you feel good, although one can fairly put the blame on global hawkishness, rising inflation risks and pressure on exports.

India is not the only economy to falter on growth. Even the US, UK and the EU are faltering on growth for several reasons. Firstly, the Russia-Ukraine war shows no signs of relenting (in fact it is aggravating) and that is contributing largely to the energy crisis globally. That is hitting growth and input costs. China’s obsession with zero-COVID is hitting supply chains hard as factories are shut for too long. Add to that, the persistent tightening by central banks and you have a classical anti-growth situation. While growth revisions in the last 3 months have been broadly favourable, negative IIP growth does come at inopportune time.

Mining, manufacturing and electricity in August 2022.

Normally, IIP is broken up into 3 principal components viz. mining, manufacturing and electricity, with manufacturing having a weightage of 77.6% in the IIP basket. Hence the overall IIP performance tends to gravitate towards the manufacturing growth. For the month of August 2022, the mining sector contracted by -3.86%, manufacturing contracted by -0.68% while the electricity sector grew at 1.38%. This resulted in overall IIP showing negative growth of -0.83%; largely inclining towards the manufacturing growth. If you consider FY23 till date; mining grew 4.2%, manufacturing at 7.9% and electricity at 10.6%. 

One big message coming from the IIP numbers is that exports have driven the fall in IIP since it was the export heavy segments that faced the most pain. That was due to a mix of global recession fears, higher rates, battle against inflation and supply chain constraints. For August 2022, the growing sectors included furniture (+44.4%), Recorded Media (+27.6%), Motor Vehicles (+23.7%) and Beverages (+7.2%). Now for the pressure points. The contracting sectors included Electrical Equipment (-28.2%), Pharma (-19.0%), Apparel (-18.3%), leather (-15.3%) and textiles (-12.2%). Clearly, slowdown is in the export story. 

One problem with the yoy growth numbers discussed above is that they are too base effect dependent. One option is to move to sequential growth on a MOM (month on month) basis. That captures the short term triggers a lot better. Check the table below for a comprehensive picture of how the IIP panned out for the 3 key components.

Data Source: MOSPI

What are the key takeaways from the high frequency MOM growth in IIP for August 2022? Apparently, there is short term pressure coming from the exports front and that is what the manufacturing segment shows. In addition, the specific curbs on mining exports put by India has also resulted in lower growth of mining output for August 2022. These trends are captured in the MOM numbers. The export pressure is largely a function of the global slowdown in demand as companies get more wary of the recession blues. They are not just postponing investment plans, but even putting them off for the time being.

Big question, will the RBI look at growth more seriously?

Ideally, the RBI should now look at growth more seriously. Hawkishness is hitting IIP growth but it is not curbing inflation. RBI has been obsessed with cutting down inflation and it has hiked rates by 190 basis points since May 2022. That does not seem to be working. Remember, that the growth engine is the biggest advantage that India brings to the table and too much RBI hawkishness has left growth struggling. Ideally, it should be IIP and growth that should matter more in the coming months and that is the strategy that China has adopted. Probably, what works for DMs does not work for EMs. Time for a rethink!